Considering an overseas acquisition?

Written on 8 Feb 2018

Expanding overseas can take multiple forms, but an increasingly popular approach is to acquire an existing business and “fast-track” market entry.  Clearly there are many issues to consider which add complications to a deal that would otherwise not form part of a purely domestic transaction.  We’ve picked up on a few of the most obvious stumbling blocks below – but of course these are just the tip of the iceberg!

What are you acquiring?

One approach to international expansion is to acquire an existing business overseas. Sometimes that is a proactive decision where the operation is headquartered in a different country and in other cases the overseas business is packaged within a group of companies, whose parent company is in the US.

In either scenario, it is vitally important that you take appropriate steps and counseling to ensure you are aware of the different laws and hurdles which accompany cross-border transactions.

Structure

The first hurdle is considering structure. One of the reasons for this is that acquiring an ongoing business/division in Europe through the purchase of its assets and goodwill will also include its employees: whether you like it or not!  Employees are protected from dismissal when their employment is transferred along with the remainder of the business operation.  Often a reorganization as part of integration is planned and you should be aware that your own employees could also benefit from that protection (in case you were considering letting them all go instead!).

On a connected basis, be aware that if you are doing a US assets deal, one of those assets may well be shares in an overseas corporation. That means that while you will be focussed on asset purchase Stateside, you need to consider the wider range of issues internationally: including what liabilities you are inheriting as part of that share purchase.

Tax planning and due diligence

Tax planning is often a key part of structuring and so it’s vital that local tax issues are considered where a group is being acquired – particularly if the structure referred to in the previous paragraph applies.

However, there are a number of areas that diligence and deal terms should focus on when acquiring across borders:

  • People: typically, local laws will not provide for “employment at will” so you will generally be taking on the entire overseas work force and usually subject to their current terms. This will take into account bonus arrangements or anyone on long-term leave (maternity or sick leave) as such employees will be protected and will likely be entitled to return to their job (or an equivalent position).
  • Options are used overseas – sometimes under strict rules which impact on local tax treatment for the employees and the company, so clarify whether the transaction accelerates those options and don’t assume “cashing out” is the best solution.
  • Similarly, other benefits such as contributions to retirement plans and medical cover may need to be continued, or replicated according to local laws or market standards. Failure to take these into account could lead to fines as well as an unhappy workforce.
  • Contracts and IP: once again, diligence can help avoid nasty surprises here. Change of control provisions could lead to termination provisions being activated in key contracts. IP registrations may need updating or the IP transferred intra-group for tax reasons or where VC owners seek reassurance that valuable IP is transferred closer to home.

Integration

As well as the people issues highlighted above, consideration should be given to real estate – once again change of control may be an issue, landlord consent may be required in advance, replacement guarantees could be a condition and early termination of a lease might need to be factored into post-deal forecasts (or even purchase price).

In a similar vein, local corporate filings may need to be updated – replacing directors of overseas subsidiaries, updating local addresses and of course removing subsidiaries if mergers are not possible in certain jurisdictions.

Deal terms

This begins to get technical, but there are a number of material differences between market practices in US deals versus overseas. In Europe, hold-backs for warranty claims are not automatically assumed, indemnities are usually restricted to a limited number of identified liabilities and a concept known as “locked box” has become more popular, replacing traditional post-closing financial adjustments.

Additionally, with litigation being less prevalent, more pre-deal due diligence tends to be completed: impacting on timetable and deal costs but providing greater awareness and dealing with concerns in price adjustments or excluding certain liabilities pre-close. Indeed, simultaneous signing and closing is more typical than having a gap – save for dealing with a listed buyer or in transactions needing regulatory approval.

Brexit & GDPR:

There are two topical issues specific to European transactions which also need to be considered if they form part of the deal.

  • The UK will formally leave the EU (subject to transition arrangements) in March 2019, at which date, EU laws which apply to the UK will cease to be applicable. However, the UK government has confirmed that at the applicable date of Brexit, all such laws will be immediately imported on the UK statute book – at least until such time as they are changed. As a result, whilst legally there are fewer deal terms to change, warranties focusing on long term contracts or integration plans focussed on UK-based work forces which consist of many non-UK EU Nationals should be carefully reviewed and appropriate contingency plans considered if appropriate.
  • The General Data Protection Regulation (GDPR) is the new pan-EU data protection and privacy law which will apply in all 28 EU States (including the UK) from May 2018. Its impact will be wide–reaching, particularly affecting businesses that collect, transfer, store and otherwise derive value from the data of EU-based individuals. Reassurances from targets that appropriate steps have been taken to comply or an understanding of the risk associated with non-compliance (fines of up to 4% of worldwide revenue) should be a key part of technical and legal due diligence as well as ensuring warranties are drafted to incorporate the new rules.

Culture

Finally, as well as considering time zone differences, currencies and language, the “softer” cultural issues are often deprioritized in favor of getting the deal done quickly. However local cultures and expectations around communication and relationships could make or break a deal – particularly when acquiring from owner managed businesses or seeking to close an acqui-hire. It’s amazing that often the personal terms of an ongoing key employee are left until the last minute, rather than ensuring both parties are incentivized to get the deal done with a happy team whose engagement will be vital to maintaining a profitable overseas business once the contracts have been signed and the deal has closed.